Corporate Fraud Cases Often Spare Individuals

Dennis Kelleher, a regulatory reform advocate, said the rarity of criminal charges may encourage executives to push legal limits.Credit
Daniel Rosenbaum for The New York Times

WASHINGTON — Pharmaceutical companies, military contractors, banks and other corporations are on track to pay as much as $8 billion this year to resolve charges of defrauding the government, analysts say — a record sum and more than twice the amount assessed last year by the Justice Department.

The surge in penalties is because of a number of factors, including the resolution of longstanding actions against drug makers and military contractors, as well as lawsuits brought against mortgage lenders after the financial crisis. But it also reflects a renewed emphasis on corporate fraud, as the Justice Department devotes more resources to the issue and demands higher penalties from companies.

“We are putting more resources into these cases and better using the resources we have,” said Tony West, the acting associate attorney general.

The ballooning settlements are for civil charges of fraud against the government, criminal charges often related to the same conduct and, in the case of health care companies, recovery of money for states for Medicaid fraud.

But while the collections are a boon to the government and taxpayers, they are resurrecting questions about the relative lack of charges against executives at the companies that are getting the stiffest penalties.

“A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed,” Senator Jack Reed, Democrat of Rhode Island and chairman of a subcommittee that oversees securities regulation, said at a recent hearing.

President Obama, lawmakers and government watchdog groups have called for holding more individuals responsible. The Justice Department has collected $8.6 billion over the last three years, more than in any similar period in history, but relatively few prosecutions of individuals have come from the biggest settlements.

The most recent cases involve wrongdoing at some of the largest and most prominent companies. Last month, for example, GlaxoSmithKline said it would pay $3 billion to settle criminal and civil accusations of drug marketing and pricing fraud. In April, the military contractor ATK Launch Systems agreed to a $37 million settlement for selling “dangerous and defective” flares to the military.

The difficulties of prosecuting executives were highlighted last week in New York, where a federal jury acquitted a Citigroup manager who had been involved in selling an exotic financial security involving residential mortgages. The manager, Brian H. Stoker, was charged with falsely describing Citigroup’s role in selecting the assets in the portfolio and failing to disclose that Citigroup was betting against the investment.

The jury cleared Mr. Stoker in part because the bank had given investors fine-print materials that apparently warned them of the investment’s risks. In a rare move, though, the jury sent a note to the Securities and Exchange Commission after reaching its decision, urging the agency not to give up. “This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” the jury wrote.

Lawyers say the government is more likely to go after companies because of their deep pockets. Civil cases against businesses can often produce substantial financial awards without the risk inherent in a trial. Civil charges also have a lower burden of proof than criminal charges and can reap triple damages. By one estimate, the government recoups $15 for every $1 spent on a civil case against a company.

But a top government enforcement official gave another reason, saying it was often too difficult and expensive to find evidence that clearly linked individual actions to corporate wrongdoing. Senior executives in particular are often insulated from day-to-day decisions, the official said, and have learned to steer clear of e-mails or other evidence that might prove that they knew the company was breaking the law. The official spoke on the condition of anonymity because more companies and executives were expected to be taken to court.

The Justice Department said its prosecutors assessed how strong the evidence was and the likelihood of a successful trial in deciding whether to charge individuals. Even if a company has settled a case, it said, an investigation of individual conduct can continue and might eventually result in charges.

“To the extent you do not see many individuals being held accountable, that’s not because of a lack of will on the part of the Department of Justice,” said Mr. West, the acting associate attorney general. “There is a lot of behavior that makes us angry but which is not necessarily illegal. If the evidence is there, we won’t hesitate to bring those cases.”

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Tony West of the Justice Department defended its tactics.Credit
Chip Somodevilla/Getty Images

Dozens of individuals have been charged in financial cases. The S.E.C. says it has charged 55 chief executives and other senior officers with violating securities law in relation to the financial crisis. The commission has collected $2.2 billion in penalties, disgorgement and other monetary relief from cases related to the crisis.

In particular, cases of fraud against the government, brought under the False Claims Act, have been rising in recent years. The trend began after a realignment of enforcement resources three years ago, Mr. West said, and the increase in settlements has resulted in even more whistle-blower accusations being reported to the department.

Critics remain, however, arguing that the practice of settling fraud cases with companies while not charging any employees might be giving executives an incentive to push the limits of the law. “If you are an executive, you know that the chances of getting caught are infinitely small, and the chances of getting caught and prosecuted are even smaller,” said Dennis M. Kelleher, president of Better Markets, which advocates financial regulatory reform.

It is difficult to determine the exact dollar amount of settlements, in part because measurement methods differ. The Justice Department said that in the fiscal year ended Sept. 30, 2011, it settled $3 billion in civil whistle-blower cases.

The department has already surpassed that number for the current fiscal year, but it said it did not keep running tallies of its penalties. These figures do not include a $25 billion settlement with banks over fraudulent foreclosure practices that was announced in February.

Patrick Burns, a spokesman for Taxpayers Against Fraud, an advocacy group for whistle-blowers, said that civil fraud cases, related criminal settlements and recoveries for states exceeded $4 billion last year, and that he believed the number would more than double this year.

In a recent report to clients, the law firm Gibson Dunn & Crutcher calculated that civil cases under the False Claims Act alone brought in more than $4.1 billion in the first six months of 2012, with criminal settlements and payments to states adding $2.7 billion.

“The government seems very proud of the amount of money they are bringing in,” said D. Grayson Yeargin, a partner at Nixon Peabody in Washington who often represents companies in False Claims Act cases. “And they may be ramping it up even more.”

Correction: August 7, 2012

An earlier version of this article misidentified a federal program for which the Justice Department recovered fraudulent payments to health care companies. It is Medicaid, not Medicare.

A version of this article appears in print on August 8, 2012, on page B1 of the New York edition with the headline: Fraud Cases Often Spare Individuals. Order Reprints|Today's Paper|Subscribe